Many businesses, since inception, find a myriad of challenges along the way, from having the idea to launch a minimum viable product (MVP). However, one of the biggest challenges for any entrepreneur, and maybe also yours, comes with raising funds to back your startup. Most of the entrepreneurs look for banks, angel investors, or investment firms. However, one of the most exciting ways of getting funds is a method called crowdfunding. Here we will show you the intricacies and types of crowdfunding you can get.
We will also talk about and guide you through the most well known and active company in crowdfunding, Kickstarter. So stay tuned! And we hope this article helps you on your entrepreneur journey.
What is Crowdfunding?
Crowdfunding is an exciting concept, and it's considered an alternative form of finance. People have brilliant projects, but no funds to grow their ideas turn to people, or let's say crowds here, to help them in achieving their goals.
Apart from getting the funds needed to build their projects, people get a sign of support to continue their dreams. If someone is willingly investing in something you have created would be a massive boost of confidence to keep going.
So, before you decided to kickstart your crowdfunding dreams, you need to know the ins and out.
The people donating the money are commonly known as backers, do so knowing the risk of not getting any return. There are usually incentives for donations, receiving a reward, or a financial benefit. However, there is no real guarantee of a guaranteed rate on investment when using crowdfunding platforms.
So if you feel vibrant and have a good feeling about a project, go ahead but remember to be smart about it.
If you do want to be someone's guardian backer, you should first be clear on the term crowdsourcing and crowdfunding. People tend to use both words interchangeably, which is incorrect. Crowdsourcing is sourcing services and goods from people, whereas crowdfunding is sourcing funds explicitly only.
Brief History of Crowdfunding
Crowdfunding existed before the age of the internet. Before crowdfunding platforms existed other means like newspapers were used. Writers would advertise their book projects via subscription schemes. Once enough subscribers showed their eagerness to read the book, the writer would go ahead and publish it. Although writers used subscriptions instead of funds, the central concept is the same.
In 1885, Joseph Pulitzer used his newspaper as a crowdfunding platform, calling for donations for the pedestal that the Statue of Liberty stands on today. He managed to raise $102,000 which today would translate to $2.7 million.
After the dawn of the internet, the first known record online was in 1997. A British rock band used online donations to fund their reunion tour. It was a success. Soon after inspired by the band's success, in 2000, Artistshare became the first crowdfunding platform. After that, platforms just kept on emerging, and today we have more than 700. It is possible that right now on one of these websites someone is asking for funds for a pedestal that will hold the next Statue of Liberty.
Today's world of crowdfunding platforms
If you’re trying to be a backer, or a person with a project to change the world, choosing the right platform out of more than 700 would be difficult. So before entering the world of crowdfunding, whether you’re a backer or an entrepreneur, you would want to know the ins and out.
The Four Types of Crowdfunding
1) Debt crowdfunding
The debt crowdfunding is very similar to a loan offered by a bank. Investors will receive interest on their investment. The debt funding option is attractive since the cost of borrowing is low, compared to banks. It is especially easier for those businesses which have a track record of revenues.
Lendingclub is a well-known debt crowdfunding platform. It has raised more than $20 billion and offers business loans up to $300,000 for five years.
2) Reward crowdfunding
Unlike the financial benefit in debt crowdfunding, backers receive rewards in the form of gifts, samples, or in the case of events, free tickets. Projects that are usually of a creative background gravitate toward this type of crowdfunding. The plus side of this type is often a cheap way to get the donations needed.
3) Equity Crowdfunding
Businesses that have long term goals, and focus on growth, go for such funding. In return for their donation, backers will receive shares or some other sort of equity in the business.
The best platform for equity-based crowdfunding would be Crowdfunder. Apart from giving you the option to choose your investors, it also has a powerful CRM tool that helps you keep track of your campaign.
4) Donation crowdfunding
Projects raising money for Charites or other small projects for people in need depend on such funding. The donation crowdfunding method is a purely donation-based with no financial or now financial benefit for the backer.
Gofundme is one of the most popular donation crowdfunding sites.
Continuing with our theme of start-up sites and the mechanics behind them, let's discuss a start-up that built its entire platform on crowdfunding: a start-up starting start-ups, eh? How can you not succeed!
What I am talking about is the site Kickstarter. The platform allows for creative projects to get a chance at being fully funded and distributed by backers, Backers back the project – enough said, right?
The Kickstarter method
Kickstarter classifies projects into "categories," "features," and "spotlight." It also allows enthusiasts to explore projects that might catch their interests — Nice, simple setup that has seen booming success, not just for creators but for Kickstarter itself.
How did it Kickstarter kickstart?
The seemingly altruistic idea for the start-up began in its launch in April of 2009 in NYC. The platform was created by Perry Chen, Yancey Strickler, and Charles Adler and got its own' explosive growth-hack via, coincidentally enough, backers! The company grew up on the cliché of New Yorkers banding together in a crisis / for a good cause. With its start in April 2009, the New York Times was already singing its praises as one of the best inventions of 2010. Kickstarter was successfully funded, in short.
Plenty of start-ups use similar techniques of adapting an old idea into one with a new image, so it is no surprise here. Kickstarter has its rules:
- You need to have a prototype that needs to be yours;
- The rewards have to be singular and straightforward;
- The idea can't be mad science.
Backers choose their amount; the money goes to the creator with Kickstarter taking out a 5% charge for hosting. If the project is fully funded, then everyone is all set. The down-side is that Kickstarter does not claim authority when it comes to creators not honoring their promises, delivering their products or on the product being a success.
Everyone is advised to use their best judgment when backing a project. Also, donations will be returned if the funding does not reach its goal in the allotted time. Despite the hands-off approach in that sense, Kickstarter has had a few projects canceled due to suspected fraudulence.
Kickstarter has dealt with its lawsuits from companies complaining its creators to steal ideas or create products similar to their own. The site is still standing and maintains its dedication to open-source funding, so those lawsuits don't seem to have put a considerable dent in the driven community.
There are still some open spats, mind. Still, it is not the gambling of sorts that has lifted Kickstarter to success. Its decision to post statistics allowed for plenty of curious folks to get an idea of how they were chugging along.
Their first million-dollar breaker campaign was a dock made for the Apple iPhone in February 2012. 2012 winded up being an excellent year for Kickstarter. From their first million-dollar campaign to their currently listed highest-grossing project, Pebble Time, it is clear that Kickstarter has hit their stride.
Kickstarter, valued at well over a hundred million dollars today, is an example of a simple idea that hit explosive growth and has become another success story. The platform had millions of dollars raised and had a good handful of successful projects. Some of its projects even won awards.
Kickstarter shows not only what a good idea can do, but the power people can place in a start-up.
More Success stories
As you read this article, someone is putting up their idea for funds which could be a million-dollar company tomorrow.
Here's a list of a few ideas that turned into million-dollar companies and one movie:
- Veronica Mars Movie: A hit TV series that fans couldn't get enough of. The initial goal was $2 million, and what they ended up was with a little more than $5.7 million. It is the fifth-highest project to date.
- Oculus Virtual Reality Headset: Oculus is considered one of the most successful crowdfunding projects after its acquisition for a whopping $2 billion. A VR headset project that started in an engineer's parent's garage intending only to earn $250,000 eventually made $2.4 million.Virtual Reality Headset: Oculus is considered as one of the most successful crowdfunding projects after it was purchased for a whopping $2 billion. A VR headset project that started in an engineer's parent's garage with a goal to only earn $250,000 eventually earned $2.4 million.
- Skybell, whether you're inside your house avoiding people, or out on an errand, you would want to know who is ringing your doorbell. Skybell video sends a live video to your smartphone whenever the bell rings, giving you plenty of time to think of a plan of action. Skybell video managed to earn $600,000 in 30 days on Indiegogo.
In today's world, technology is moving very fast, and innovation is growing more every day. Therefore, there is a need for innovation that could change regular day to day activities. Have you ever imagined opening the door remotely when you hear the doorbell from someone you are waiting for?
So if you have a million-dollar idea or a good investment acumen with money to spare, crowdfunding platforms are there to help you out.
In this article, you could learn a little bit more about what types of crowdfunding are available. Also, you could see more about the most well known and powerful platform out there, the Kickstarter.
We also give you other platforms depending on the based on the different types of crowdfunding you're looking for: Debt, Rewards, Equity, or Donation.